NFTs, Explained

A little over a year ago, we lived in ignorant bliss — nobody talked about blockchain, very few people had any stake in Bitcoin, and “NFT” was no different from any other random assortment of letters.

But if time has proven anything, it’s that we are at the precipice of an entirely new digital age. So we should at least try to keep up, lest we suffer the same fate as any Boomer that refused to learn about computers — the same ones that made their kids drive to their house to log them onto Zoom during the height of the pandemic.

Let’s break down the basics:

WTF is an NFT?

• NFT stands for “Non-fungible token” — but what does that even mean? Who is trying to funge tokens anyways? Who even has tokens in which to funge?
• Non-fungible means that it is one of a kind. For example, a bitcoin would be considered something that is fungible, because you are able to trade one bitcoin for another bitcoin and have exactly the same thing. NFTs are non-fungible, because like snowflakes, no two NFTs are exactly alike, and thus cannot be funged.

What’s the connection between cryptocurrency and NFTs?

• Cryptocurrency is used to purchase NFTs
• Cryptocurrencies are digital payment systems that don’t rely on banks to complete transactions — essentially, payments are sent person-to-person and recorded on a public ledger called blockchain.

Okay, but what is an NFT?

• The basic answer is…anything digital: an NFT could be a drawing, music, film, or anything that you can put into a digital format — including AI. While most of the hype surrounding NFTs has been about digital art, the possibilities are truly endless in what technically qualifies as an unfungible token. There have been NFT tweets, selfies, and digital avatars that have all sold in the NFT market within the past year.

Wait, people are paying for these? Can’t I just screenshot them??

• Yes, people are paying for these — a lot, but owning an NFT is not quite as simple as just having a screenshot.
• Think of it like owning an original Picasso — sure, anybody could buy a print of your painting, but only you own the original work.

But what’s the point of owning the original work online? I can’t even touch it!

• While it’s true that most NFTs have limited value when the asset is just something like a digital painting, a lot of NFTs unlock greater value for holders — some give access to events, to communities, or even to restaurants.
• The value of the NFT is driven by the community. The most successful NFT projects out there have a proper and clear roadmap with tangible utility — take for example Coachella’s NFT project, where NFT holders will receive lifetime access to the festival in addition to Coachella-produced virtual events. These NFTs have clear and tangible value that is tied into a community experience.
• The more vibrant the community and the higher the utility the more engaged people will be and the more demand will come out of this.

But, who do NFTs benefit?

• NFTs provide the greatest value to artists, as they are able to collect royalties on every mint (original creation of an NFT) and on every sale thereafter. Artists are now able to be better compensated and continue to be compensated for the entire lifespan of the artwork, which in the digital world, is infinite. Royalties can range anywhere from 0% — 10% of the transaction value on any purchase of that creators’ NFTs
• Some NFT marketplaces have even started to provide benefits to the buyer and seller community by giving back fees to users. An example of this is Looks Rare, an up and coming NFT platform, where every time you buy or sell an NFT using the platform, the user will receive LOOKs tokens. Normal NFT transactions will require a fee (commonly referred to as gas fees), which is how the marketplace generates profits. Looks Rare differs from other platforms in that all the fees generated are aggregated and then redistributed to all LOOKs token holders, allowing for a fully decentralized system where users are rewarded the more they use the platform
• Platforms like Looks Rare have been able to bring exposure to new artists and allow for those artists to properly monetize their work, and many believe this is only the beginning
• Perhaps the best example of NFTs benefiting creators comes from rapper Tory Lanez, who decided to release his 2021 album ‘When its Dark’ as an NFT. The album sold one million copies in under a minute, making him the first artist in history to reach this milestone. The collection originally had a mint price of .1ETH (~$277); however, one of the NFTs has since been flipped for $50,000. Lanez will receive royalities on this sale in addition to the original sale of the NFT, exponentially increasing his profit margin on this project

Are NFTs bad for the environment?

• Yes! At least for now.
• Most NFTs are a part of the Ethereum blockchain. This means that they’re traded using Ethereum cryptocurrency, which is probably the most popular form of crypto outside of Bitcoin.
• The blockchain keeps a recording of every transaction so that people don’t spend the same digital coins twice; however, to keep payment histories anonymous, cryptocurrencies use cryptography to secure them.
• There are two main types of Blockchain technology today — Proof of Work (ie: Bitcoin and Ethereum) and Proof of Stake (ie: other Layer 1s and ETH2.0, which is in process). Proof of work is the mining piece that is requiring a ton of energy consumption.
• Proof of work cryptocurrencies like Ethereum are “mined” using large supercomputers that solve complex mathematical problems to generate coins — and these computers take up a ton of energy.
• According to Digiconomist, a cryptocurrency analytics site, a single Ethereum coin takes up about 260.25 kWh (kilowatts per hour) — equivalent to the power consumption of an average U.S. household over 8.8 days.

However, there is hope for the future of eco-friendly NFTs:

• Lazy minting: This is not necessarily dramatically better, around 2x, or maybe 3x less carbon footprint. This is done by not creating an NFT until its first purchase.
• Sidechains: NFTs are minted on non-Ethereum PoS sidechains but can be moved onto Ethereum later. If they are not moved, they can be hundreds times more efficient.
• Bridges: Are specifically for making one blockchain ecosystem compatible with another blockchain. This can also be referred to as interoperability and allows chains to interact which otherwise cannot. The advantage of this is you can go from ETH to another less impactful chain without losing the data minted.
• Various Layer 2 (L2) scaling optimizations: Can be up to 100x more efficient. [Proof of Stake]
• Because of these concerns, most cryptomining is now shifting to renewables, especially for Bitcoin. Ethereum is in the process of switching to a Proof of Stake concept, meaning that 99% of the energy consumption will be reduced.
• There are also other companies that are working to create eco-friendly NFTs. For example, NFT marketplace OneOf has described itself as a “green NFT” platform, claiming to use over 2 million times less energy per NFT than other platforms.
• Source: Branch.climateaction.tech

As the NFT space continues to evolve, sustainability is critical in creating assets that will last. While NFTs at present are posing a threat to the environment, the future is ripe with opportunity for emerging platforms and systems that can match the promise of the digital market with conscientiousness towards the world around us.

Essentially, NFTs have created a new asset class that can be controlled by the people. While making millions on your first non-fungible token is pretty unlikely, it’s important to understand what NFTs are and how they work so that we can take advantage of this opportunity in a changing digital market.

Still confused? Comment your NFT questions and we’ll break it down for you.